Tax-free bonds which have been languishing for more than six months due to lack of investor interest in the secondary market, are in demand again.

High networth individuals and some institutional investors are willing to invest in the instrument via the secondary market as they expect new tax-free series to offer lower rates on the back of expected fall in the benchmark yield and the odds for more rate cuts by the central bank have increased.

"For HNIs wanting larger allocation, secondary tax frees will make sense, if there is some supply," said Himanshu Bhagat, managing partner at IIFL Wealth. "Here (secondary market), we can then see some limited yield correction."

During 2013-14, Rs 49,200 crore of tax-free bonds were sold with rates offered in the range of 8.01-8.76% for 10-20 year maturities. Two years earlier, bonds worth Rs 48,000 crore were offered at a wide range of 6.82-8.30%.

A week ago, the government mandated seven top-rated state-run companies to raise Rs 40,000 crore this financial year. Issuers are expected to start bond sales from this month-end in a phased manner. Sizable issues are expected in October-March, the period people plan their tax saving and have funds to invest."HNIs and some cash-rich corporates are now keen to take bets on tax-free bonds via the secondary market as yields may fall five to 10 basis points," said Ajay Manglunia, head of fixed income at Edelweiss Financial Services. "The new series could offer lower rates following the expected fall in the benchmark yield."

The benchmark yield on Monday rose six basis points to 7.86%, pushing prices down as an additional Rs 10,000 crore bond supply by the Reserve Bank of India added to the supply-side this week.

But, good rains along with macro parameters will leave more rooms for the central bank for rate cuts this financial year. Lower interest rate in the market would pull bond yields lower. Also, the latest Greece debt deal has put a lid on speculation that the debt-ridden country would exit the European Union and prompt a market turmoil.

On an average, the benchmark yield is expected to fall to the 7.50% level in the next three to six months, dealers said.

Going by the incumbent benchmark yield as of now, an investor can earn as high as 7.25-7.5% by investing in the new series of tax-free bonds with 10-15-20 year maturities. Tax-free bonds will be priced after adding 45-80 basis points (varies on investor class and security rating) to the yield of similar-maturity sovereign bonds."If the existing secondary market tax-free bond yields are near the 7.10-7.25% levels, it makes sense for HNIs (investing above Rs 10 lakh) to invest a portion of their money", said Rupesh Bhansali, head-distribution at GEPL Capital.

In the secondary market, 10-year triple-A rated tax-free bonds are yielding 7.15-7.25%. On 15-year paper, the yield is 7.25%.

Yield on the National Highway Authorities of India's 15-year tax-free bond has fallen five basis points in the past three weeks. Since the beginning of the financial year, this paper has seen transactions 15 times until July 9.